Buydown Pricing Mechanics Every Loan Officer Should Know

Rate buydowns have become a standard tool since rates climbed, but most LOs quote them without understanding the underlying pricing. That gap costs deals.

How Buydown Cost Is Calculated

A temporary buydown is funded by a lump-sum deposit into an escrow account. The cost equals the sum of the monthly payment differences across the buydown period. A 2-1 buydown on a $400,000 loan at 7.5% costs roughly 2.3% to 2.5% of the loan amount depending on the amortization schedule. That cost is typically covered by the seller as a concession, a builder incentive, or lender credits.

Temporary vs Permanent: The Math Comparison

• ✦2-1 buydown: rate is 2% below note rate in year one, 1% below in year two, then reverts to note rate permanently
• ✦1-0 buydown: single year of relief at 1% below note rate
• ✦Permanent buydown: each discount point typically lowers the rate by 0.25%; break-even is around 48 to 60 months depending on the lender
• ✦Lender-funded buydown via par-plus pricing: rate goes up, lender credits fund the buydown account; borrower gets payment relief with no out-of-pocket cost

Fannie Mae and Freddie Mac Temporary Buydown Rules

Agency guidelines cap temporary buydowns at 2% below the note rate in any single year. The escrow account must be held by the servicer. Funds cannot be refunded to the borrower at payoff. On Fannie Mae loans, temporary buydown escrow counts toward required reserves only if the servicer applies it to the monthly payment shortfall, not principal.

When to Use Each Structure

• ✦2-1 buydown: high-rate environment, seller concession available, borrower expects income to rise in years one and two
• ✦Permanent points: borrower plans to hold 5-plus years and break-even math clears
• ✦Lender credit structure: buyer needs to minimize closing costs, property has limited seller concession room
• ✦1-0 buydown: bridge strategy when rate drop is expected within 12 months